Despite global debt worries, the global economy is humming like a
well-oiled machine. Proof came once again this morning in the form
of strongly positive earnings reports from two industrial giants
with broad overseas exposure,
Eaton Corporation (ETN) and
CNH Global (CNH).
Diversified manufacturer Eaton offered second
quarter EPS which grew 43% year over year, mainly on 12% end-market
growth. Eaton's operating earnings per share reached 97 cents in
the quarter, beating the Zacks Consensus Estimate of 95 cents and
exceeding the high end of the company's second quarter guidance
range of 90-96 cents.
The company, which makes and sells a wide range of
products to over 150 countries, including electrical power grid
components and controls, fluid power systems, and aviation power
accessories, believes the year is shaping up to be better than what
was forecast in April 2011. Eaton now estimates its overall
end-market growth for the full year at 11% versus the previous
forecast of 10%.
Given its strong performance in the first half of
the year, Eaton expects 2011 to be a year of record sales and
profits with 19% growth from the 2010 level and record a 6% rise
from its previous annual sales record achieved in 2008.
Based on second quarter results and the revised
market outlook for 2011, Eaton has now raised its full-year GAAP
earnings guidance by 15 cents to $3.86-$4.06 per share, while
adjusted earnings are expected between $3.90 and $4.10 per
share.
Dow to 20,000 by 2015 on Emerging
Markets
In early June, I responded to James Altucher's
crystal ball article on MarketWatch about "Dow 20K" with some
fundamental substance to put underneath the prediction. I used
Eaton as an example of an industrial beneficiary of Emerging
Markets and a stock I had recommended buying at $40 last October.
Here's what I wrote in "How Dow 20K?":
"What's driving the stock market recovery -- as
much as, if not more than, any extraordinary monetary policy -- is
Emerging Markets. Global growth and demand from dozens of countries
with emerging middle class populations that want the lifestyles of
the West have kept the profits of companies like Caterpillar
(CAT) and Eaton brimming as infrastructure development in the BRICs
and beyond merely hiccupped during the US banking crisis and then
forged on."
Global industrial infrastructure demand aside, if
you are going to build big new cities for people to live and work
in, there's another area of development you better have figured
out: food. Since early 2010, I've been writing about the next ten
years being "the decade of food" because of the global dynamic that
happens in planetary agricultural demands when 2 billion shift to a
Western meat-based diet.
After I attended the World Agricultural Conference
in Chicago in May, my awareness of the dynamics was greatly
expanded. I was a buyer of the fertilizer, seed, and machinery
companies prior to that -- like Potash (POT),
Monsanto (MON), and Deere (DE) -- and I only became
more interested after hearing top AG economists and investors talk
about the global food puzzle with a world headed toward 9 billion
inhabitants by 2050.
The Decade of Food
One thing that stood out at that conference was the
surge of Private Equity interest in this space. Here's what I wrote
for TheStreet.com on May 10:
"The investible agribusiness universe is estimated
to be between $600 billion and $2.2 trillion, depending on how you
slice the criteria for inclusion (e.g., what percentage of a
company's revenues come directly from ag-related activities). And
much of the serious investing that's going on is being done through
Private Equity (PE), not public companies.
Bill Goodbar, Managing Director of Agricapital
Corporation, noted in his presentation that 63 new PE firms are
looking to raise over $13 billion for new investments, both
domestic and abroad. This money will pour into farming land,
corporate farm development, infrastructure, transportation,
chemicals, seeds, and biotechnology, water use and irrigation,
machinery, processors, grocers, a dozen other logistical points in
the supply chains."
On June 9, I wrote about a small farm equipment
dealer, Titan Machinery (TITN), that sells the Case and New
Holland brands of agricultural and construction machinery. Titan
blew away street estimates by nearly twice expectations with a
four-fold increase in profits from the year-ago quarter's results.
The article "Farm Machinery Plows Profits," highlights three macro
forces of the equipment dealer's success.
Farming on Fire
And today's news from CNH Global only adds more
fuel to this fire. The manufacturer of Case and New Holland
equipment posted a net income before restructuring and exceptional
items of $320 million or $1.33 per share in the second quarter of
2011, which soared from a net income of $140 million or 59 cents in
the year-earlier quarter.
Beating the street consensus by 34 cents, CNH
shares have been trading up over $4 (11%) for most of Monday, to
two-month highs above $41. Net sales of Equipment, excluding
revenue from Financial Services were $4.88 billion, up 24% from the
year-earlier quarter, driven by a double-digit growth across
Agricultural Equipment and Construction Equipment.
On a segmental basis, revenues from Agricultural
Equipment were $3.9 billion, up 22% from the year-earlier quarter,
led by favorable trading conditions across all regions. Revenues
from Construction Equipment were $1030 million, up 30% from the
year-earlier quarter, led by improvements in market conditions in
all regions, especially the North American markets.
For fiscal 2011, management expects strong demand
in the agricultural and construction equipment markets, driven by a
favorable environment for agricultural commodity prices and an
improvement in the Construction Equipment.
Based on the company's performance, management
upgraded its fiscal 2011 revenue guidance to 15%-20%, up from the
previous expectation of 10% growth. The company also expects
operating margin at the upper end of its previous guidance of 7.1%
to 7.9%.
CAT Miss Is Irrelevant
And how is Caterpillar holding up after its profit
miss last week? Pretty good, actually. The nearly 6% hit the stock
took Friday was extended somewhat Monday morning, but the CAT is
clawing its way back to regain the $106 level.
This strength in the face of fears about a
potential US debt default is very encouraging. But what likely has
real buyers of CAT stock encouraged was the company's strong
guidance for the rest of the year. Here’s what I wrote on
Friday:
"Explaining its earnings miss today, even on record
sales and revenues, Caterpillar executives spoke about the
slower-than-expected pace of recovery in the second quarter,
particularly due to the impacts of the Japan quake devastation.
But, the company also raised guidance for the
second half of the year, noting that excluding the impact of the
Bucyrus acquisition, they expect revenues in a range of $54 to $56
billion and earnings per share of $6.75 to $7.25, compared with the
prior guidance of $52 to $54 billion in sales and revenues and
earnings per share of $6.25 to $6.75."
What the World Needs Now is Engines of
Growth
After these strong earnings reports from three
industrial heavy-weights -- CAT, ETN, and CNH -- all eyes will be
on Cummins (CMI) Tuesday for its contribution scheduled after the
close. I've been writing about Cummins for months now as a dominant
diesel engine maker with its hooks in a wild card industry: natural
gas engines for America's trucking fleets -- and its energy
independence. See my "Alternative Energy Wars" for more on that
dream.
I took the opportunity to sell puts on the stock
when it pulled back below $95 in mid-June, shorting the January 90
strike for $10. See a video description of that trade strategy in
"Naked Puts: How to Profit from Your Favorite Stocks."
If the global economy is about to buckle from
Japan's devastating earth quake, revolutions in oil-rich nations,
or the US debt ceiling crisis, you wouldn't know it looking at
industrial stocks. Power on.
Kevin Cook is a Senior Stock Strategist for
Zacks.com
CATERPILLAR INC (CAT): Free Stock Analysis Report
CUMMINS INC (CMI): Free Stock Analysis Report
CNH GLOBAL NV (CNH): Free Stock Analysis Report
EATON CORP (ETN): Free Stock Analysis Report
POTASH SASK (POT): Free Stock Analysis Report
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